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Toll’s Plea: Subsidize House Prices

Just a year ago, Robert I. Toll, the chief executive of Toll Brothers, had figured out why people were canceling contracts to buy homes. It was our fault.

As I wrote then:

Asked why so many buyers were canceling contracts, he said few had trouble getting mortgages, but that more had run into their own financial problems or could not sell their old house. And, he added, 17 percent of the cancellations came from investors or “people who just wanted to walk.”

“Translation, they’ve read one too many Times articles, and decided now is not the time to buy a home.”

A few months later, Toll, which bills itself as “the nation’s leading builder of luxury homes,” reported that Mr. Toll’s niece, the daughter of a founding brother, was among those canceling purchases.

Today, Toll reported its fourth-quarter revenues. They are down again, with cancellations ticking up. A bit belatedly, Mr. Toll realizes his fleeing customers were right: There really is an economic problem.

He has a solution:

“We urge Congress to stimulate demand by reducing mortgage rates and fees and by providing incentives such as a buyer tax credit for the purchase of all types of homes. We believe these initiatives would offer the greatest benefit for the taxpayer’s dollar.”

The way he sees it, stabilizing home prices is the only way to keep all the other efforts from failing.

“Congress has allocated hundreds of billions of dollars to reset mortgages, help people who are in foreclosure, and protect those who have been the victims of rapacious lending practices. We believe all of these goals are very worthy. However, we believe that, if home prices are not stabilized, these efforts will be for naught, more mortgages will go under, and the taxpayers’ money will have been wasted.”

Others might say that tax breaks and unreasonably low interest rates helped to get us into this mess. Making new buyers overpay runs the risk of a repeat of what happened after the Japanese bubble burst, when artificially high prices simply prolonged the pain.

Helping homeowners without producing unintended results will not be easy, as my colleague David Leonhardt wrote recently. This sounds like little more than a plea to bail out the home builders.

As you might suspect, Mr. Toll was not worried about home prices when they were soaring to unreasonable levels. In fact, he was speculating that the rise would continue. Here’s what he had to say three years ago:

“According to two recent major studies, demand for new homes is projected to expand in the next 10 years; yet increasingly complex approval processes are constraining the supply of buildable lots. With affluent households — those earning $100,000 or more — growing six times faster than the population in general, we believe demand for luxury homes will accelerate. We now own or control approximately 60,000 home sites, a five- to six-year supply based on our current pace of growth. We believe this positions us to prosper in the coming years from the growing imbalance between demand and supply.”

It turns out that there was a “growing imbalance between demand and supply” approaching. He got just one thing wrong: It was the supply that was too big.

Toll’s conference calls are usually entertaining. Today’s is at 2 p.m. Eastern time, and one topic will no doubt be the write-offs — of at least $120 million — expected because that speculation in land backfired. You can access the call here.

Right. Never heard a peep from any of the interested parties during the last decade about how to stop the rampant inflation in housing prices. Nope, only that, by their projections, a split level in New Jersey would be worth 6 million in 10 years if things progressed as they were.
Well, home prices are stabilizing. They will revert to the historical mean in a year or two, as they should, unless, of course, the government intervenes and props up the already inflated prices to their idea of what should be “fair”. It won’t work, of course, but everyone seems to be lining up at the huge taxpayer trough the outgoing administration has filled down in Washington, so, I guess this will go on for another 10 years, just like in Japan. Wait, isn’t that still going on, sort of?

If Toll reduces the prices of the remaining surplus more than his company has thus far, he may yet find buyers. But $480,000. plus homes, all of which also have monthly association fees to pay…my develpment was about $245 when I left (I understand it is over $300. now), and SID’s (for those of you back east in old fashioned housing where your taxes pay for road and sewars etc. a SID is a special improvement district levy at the time of purchase, i.e. the builder is passing on the cost of the infrastructure to the buyer as a debt owed the municipality rather than in the quoted price of the house. So having not sort to pass along a piece of the profits in good times, why must the public now subsidize more profits for a private corporation. Better that Toll lower the prices significantly (including the cost of the SID, and reflecting that the private associations must also maintan the ocst of their roads etc), so regular folks can also afford new houses.

Funny how all the talk about falling home prices focuses on the loss to the seller, and not the benefit to the buyer. The buying and selling of residential real estate is a zero-sum game. It produces no net gain or loss to the economy.

Housing the past few years has become increasingly unaffordable for first-time buyers. Many of us boomers wonderered how our kids would ever be able to afford a house like the one they grew up in – a reversal of the American Dream.

The decline in housing prices is economically necessary and socially healthy for our nation. It opens up opportunities for first time buyers. A decrease in home values will offset a portion of the tax burden which we senior citizens are placing on our children and grandchildren.

Mr. Toll’s problem is that the nation now has too many houses, courtesy of easy credit. (And his company has too much land bought at high prices with the same easy credit.) The nation cannot build its way out of a housing glut. Credit conditions will never be the same again. We cannot go forward to the past.

As the world must surely know by now house prices must fall by at least 30% to at least 50% from the peak values which includes all of Manhattan and the whole country. In a way, every body will suffer except those smart enough to have avoided buying property during the bubble years.

The government does not have enough money to save all beggers. When prices sky rocket too high then people can not possibly pay. New buyers can’t possibly be found. The house market has no choice but to deflate to real historically sustainable prices and in this current economy that has been hollowed out, with few good jobs and no savings then the fall is going to be below the historical average.

Simple, but a Ph.D. is not needed to solve this problem. Debt does not create sustainablility! Economic sustainability must exist in order to support debt.

The only answer is to bankrupt, cancel, default, ignor (meaning the statute of limitations will eventually render debt uncollectable) and stop paying as much debt as is humanly possible.

My wife and I left southern California in 2000 because there simply was no real estate we were willing to buy – we would have been paying more than half our income in mortgage.

We relocated to a reasonably priced section of New England, found a fair deal on a structurally sound old place, and secured a decent 30-year fixed mortgage. We refinanced two years later with a net savings of $200 a month.

At no point in time did we ask anybody for a “break.” We bought what we could afford. We budgeted realistically.

Mr. Toll and his ilk knew the dice were loaded and kept rolling anyway. Maybe the Feds should let the prices of the houses sink to the market level, buy them from the banks, and offer to become the landlord for all those poor saps who overbought. When the market recovers, they might have re-established credit and can buy. But when so many people are getting whacked by Adam Smith’s invisible hand without cause, I hardly think Mr. Toll should get a penny of relief.

I still don’t understand how people in real estate find it perfectly acceptable for the value of thier investments to go up 200% in three years, yet completely unacceptable to go down 30% in one year….THE HOUSING MARKET IS SUBJECT TO THE SAME MARKET CONDITIONS AS ANY OTHER TYPE OF INVESTMENT, YOU BUNCHA ********!!!!

(Sorry, had to get that off my chest).

In all seriousness, this mess happened as a result of an over-valued housing market. And now the Toll Brothers CEO wants to maintain this as the status quo. I’m hoping that others join me in contact thier local congress-person and telling them that if they help out the Realtors/Developers in a the same failed way they are trying to save the financial industry, they will do irreperable harm to the country’s long term economy and lose our votes, at the same time!!!

Oversupply of housing is the botton line, and the hosuing debacle is what is killing this economy. The government should start purchasing unoccupied homes/condos and properties facing foreclosure in order to staunch the hemoraging. The properties would be kept off the market until prices begin to recover over the next several years.

What about the poor farmers with gas under $2.00 and corn prices falling??? Deflation Baby! The market will eventually absorb all these houses at more realistic prices. I guess wood,concrete,copper,etc prices aren’t headed to the moon. Isn’t this basic physics? For every action there will be a reaction.

Housing is already heavily subsidized and that is part of the problem, and in no way a path to solution. The main subsidy has been 100% exemption from cap gains tax on the vast majority of home resales and the interest mortgage deduction. No other form of interest enjoys that exemption, and if you made a cap gain on any other asset, you would have to pay cash on the barrelhead in tax. These indirect but very real susidies caused more $$ to flow into housing that a straight-up market would have. That inflated demand, which caused prices to rise artificially, which further inflated demand and speculation, feeding on itself till it blew up. There is nothing new under the financial/subsidy sun Mr. Toll.

We should expand our perspectives. Let’s use this as an opportunity to roll back suburban sprawl. Force land to be sold at current rates to first time new farmers to grow organic vegetables. The farmland lost to predators like Toll Brothers is an environmental and cultural crime. If there is a bail out, restitution should be a precondition.

We have gotten into a crazy situation where the unthinkable is being proposed. The role of the Government is to undertake projects which the marketplace won’t and to establish a neutral working market mechanism. When the Government subsidizes individual spending the wheels have come off the bus. We are now in this panic proposing some wacky fixes in which better minds must quickly restore common sense. What is wrong with renting if you don’t have the down payment for a house?

My wife and I jointly make a little more than 100k and we would love to buy, but I can tell you that we won’t go near $2750/month in total monthly housing payments, which means that we’re pretty much priced out of the suburban northeast. That seems criminal to me. I don’t have the time to educate myself in order to properly assign blame, but I FEEL that Toll should not get a damn cent of federal funds.

The Government cannot sustain housing prices. Planned economies do not work. Any calls to attempt to sustain housing prices at current levels is a call to throw away taxpayer dollars.
The Resolution Trust Corporation of the early 90’s took over homes from failed S&L’s and sold these properties at market rates. This is the only sensible solution.

“We urge Congress to stimulate demand by reducing mortgage rates and fees and by providing incentives such as a buyer tax credit for the purchase of all types of homes. We believe these initiatives would offer the greatest benefit for the taxpayer’s dollar.”

Technically, I believe that he’s asking the Congress to pay to lower and stabilize prices. The demand is there. They’re just asking for better terms for themselves. Lowering the price even more by themselves or easing terms should accomplish the same object. It’s called supply and demand. Oh, and let’s add Ricardian Equivalence just for fun. To the extent that the government chips in, it forces the private sector out. I knew I had a use for that concept.

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